In my 2007 book ‘The Generation Game’, I wrote “Anglo Irish bank is little more than an out-of-control hedge fund leveraging themselves and their clients into property”. The lawyers for the publishers insisted that the name Anglo be dropped, for fear of litigation. So the published sentence replaced the words Anglo Irish Bank with the more general “certain well-known Dublin banks”.
And it wasn’t just me; many others had concluded this about the Irish banking system, yet the authorities did nothing.
Looking at the Anglo trial, one thing that really stands out was the complicity and the knowledge of the State in this illegal act. It has been truly breathtaking to see that the main financial institutions of the State – the Central Bank, the Financial Regulator and the Department of Finance – were all aware that Anglo was lending money to people in order to ramp up its share price artificially, but did nothing. Yet they were happy to continue to describe the banks as “well capitalised” right up to the end.
This is remarkable.
This is real Banana Republic stuff: the State knows something is illegal but rather than face it, it looks the other way. This type of behaviour goes to the root of the Irish banking crisis and, although there have been some changes at the top, the question is whether it could happen again?
The favoured narrative is that Anglo was uniquely delinquent. It may have been uniquely criminal, and that remains to be seen, but it is not the case that it went about its daily business much differently to any other institution. Remember, every single Irish bank was bailed out by the Government in 2008. Read this again. We are talking here about systemic and institutional failure on a monumental scale.
And the banks did not go bust overnight. They went bust, to paraphrase Ernest Hemingway, in two ways: first slowly, then quickly.
The economist, John Mills, said the following of crashes: “The crash doesn’t destroy wealth, it merely reflects the extent to which wealth has already been destroyed by bad investments made in the boom.”
Wealth here was not destroyed by the crash but by stupid decisions made in the boom, driven by the effervescence of the herd and fuelled by reckless lending. The banks went bust initially slowly. Every time some madcap dream of a developer was financed, ordinary depositors’ deposits were put at risk. When those loans went bad, the bank had to find the money to make up the shortfall. This is what the regulator is paid to spot – years before it gets out of hand. The financial authorities were not up to the job. Regulators are paid to spot the slow bit of the process, which prevents the fast bit of the bust.
Banks should be afraid of the regulator. If they are not, banks have an almost inbuilt tendency to lend too much during a boom, pushing up share prices. Share prices rise with profitability but, the more profitable a bank is in a boom, the more risk it is taking.
Rather than celebrate bank profits, a regulator should feel queasy, call the bank in and impose limits on lending. But it seemed that in Ireland, the regulator was happy to just watch from the sidelines and cheer on bank profits, continuing until the very end to say that the banks were “well capitalised” when, in fact, the opposite was the case.
From 2003 on, the rapid expansion of property lending was largely financed with loans from international investors. From less than €15bn in 2003, international borrowings of the six main Irish banks rose to almost €100bn (a lot more than half of GDP) by 2007.
There is a tendency to blame Anglo for everything as if in some way it was acting alone. This was not the case. They were all at it.
To put the banks’ borrowings in context, AIB and Bank of Ireland (BoI) doubled their total loan books in three years. BoI took more than a century to build a loan book of €63bn and then, in three years, from 2003 to 2006, it doubled it.
The slow bust was the reckless lending and the reckless borrowing to finance that lending, which began in 2000 and went into overdrive in 2003/4, culminating in the crash of 2007/8.
The reason banks have to be watched so closely is that their assets are long term, but their liabilities are short term. This means they can get caught out easily and actually run out of money quite easily, too.
Take an ‘asset’ such as a mortgage. It has a 30-year lifespan, so it is very long term. However, the liability the bank has to correspond with this asset could be a retail deposit.
It, or a corporate deposit, could be called in overnight or maybe at most in one year. Interbank deposits are another significant component and these are typically less than a year in maturity for the most part and normally less than three months.
This means that banks can run out of money easily because their capital is only the difference between their assets and their liabilities. If the price of their assets is falling and their liabilities are being called in, they run out of money.
This is why banks first go bust slowly and then very quickly.
When our banks went bust, the Government had to act because AIB was on the brink of bankruptcy and this risked all the deposits in AIB being lost in the inevitable bank run.
Some argue now that the bank guarantee is the root of the Irish banking crisis. However, this cannot be true because the guarantee was the reaction to banks being bust. Had they not been bust there would have been no need to do anything.
The guarantee was the consequence of the Irish banking crisis, not the cause.
The crisis stared in 2000, not 2008. In fact, by 2008 it was all over.
By then, the Government had to act to protect deposits. It could not do this by merging bad banks with good ones because there were no good banks in the country. Every single bank in Ireland needed a bailout. They all needed help.
The State could have nationalised the banks there and then – but that would not have protected taxpayers. The Government could have let them go bust. The State could have let go of toxic banks but AIB, the biggest bank in the country, was on the verge of bankruptcy. Would letting AIB go have been a good idea? How many depositors would have lost everything?
The State could have grabbed hold of the country’s deposits and borrowed heavily as it did in Cyprus to try and make up the shortfall. Would that have worked?
There is a narrative in Ireland that blames the guarantee for everything, as if there was some other easy, painless option. There wasn’t. We didn’t even have a bank resolution mechanism in place. And – even more amazingly – we still don’t.
The bailout, troika and guarantee were all the consequences of the years of reckless lending and pathetic regulation that went before. All the banks were complicit.
What we saw at the recent Anglo trial was that even at the eleventh hour, the Financial Regulator, Central Bank and Department of Finance bosses were all prepared to look the other way.
David McWilliams writes daily on international economics and finance at www.globalmacro360.com
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And who needs a “banking enquiry”? Didn’t we just get all we needed to know, that which we knew already, that those in charge will not be held accountable in any meaningful way? A prison toilet with a big mean dude watching while you have a crap and threatens to give it to you up the arse would focus the mind. But maybe they will do “community service” in the form of visiting schools and giving them some math lessons instead. Im going to make myself an omelette now with diced green and red peppers and onion and a bit… Read more »
Brian Ború
Was he a Loan Shark ? Did he ask you ‘ how much do you want to Ború ?
Would he be celebrated were he alive today ?
Did a negative equity borrower kill him ?
How was he killed after all he had the best armour for protection ? Will the Bank Enquiry find this out ?
Second only to “a culture of”, “the state” is the most popular form of evasion around. The problem is decisions made by individuals. Where it was policy, the policy was decided by a group of individuals. Not only have we a retired regulator who didn’t do his job paid an eye-watering pension, but most of those who failed are still in place. http://colummccaffery.wordpress.com/2013/05/12/they-are-known-to-be-useless-and-they-are-all-still-there-a-reminder-from-eddie-hobbs/
Pension Moratorium
Electorates should DECIDE to cap all State Pensions to (say) €50,000 ( incl aggregates)
David, you’re still not naming the names of the bank regulators of that time and other dignitaries. Is someone stopping you again from calling names?
Hi Bamboo, nothing at all stopping me. There are just so many of them! D
It doesn’t just go to the root of the Irish banking crisis David. It goes to the root of Irish culture and mentality – or lack thereof.
http://awakenlongford.wordpress.com/2014/04/30/an-open-letter-to-dail-eireann/
Once again David you have approached the line but you failed to cross it, you speak about depositors money and yet you mention nothing about Securitisation, the very tool which took all…ALL of the risk out of lending for the Banks, remember, in their own documentation, a loan which there had been one single monthly repayment made for qualified for Securitisation and this was on loans which were also qualified as 100 – 110% LTV and based on qualifying criteria which allowed multiples of annual salaries of 6 and 7 times. Every single rule in the book was broken by… Read more »
David, this is no surprise to any of us. Imagine if you are a European or a British citizen looking at Ireland and saying “this state was founded in 1921 and in less than 100 years, the Irish have ran the place into the ground”. They are incapable of managing anything on their own”. We have proven that we have an a la carte state and choose to see or not see what we wish, a very insular island mentality. There are none so blind as those who do not want to see. The word that springs to my mind… Read more »
“The guarantee was the consequence of the Irish banking crisis, not the cause. The crisis stared in 2000, not 2008. In fact, by 2008 it was all over.” Unfortunate fact of life. No matter how many times you repeat this, most people still won’t grasp this. In 2008, there should have been a raid on deposits and bonds in equal measure, that would have been fair. It should have been on a per-bank basis, and not aggregated across banks. In other words, depositors and bondholders in Anglo and AIB should have been hit for losses in Anglo and AIB. There… Read more »
So those who had money in the banks would have lost their money, but now everyone in the country, whether they had money or not pays and worse still people born after the fact will also be paying for this… is that right?
What’s ironic is those who had deposits in the banks are now out bidding up the price of houses, because they didn’t lose their money and now families are being priced out of the market once again. There’s no sense to this, it’s not right.
The fact that the 6 mains banks’ international borrowings grew to be six times more in 4 years, shows not only how wreckless the banks were, but also how little the general public seemed to know what was going on. Generally speaking, we as a nation put so much blind faith in the banks, regulator and government and thought that they knew what they were doing. There was probably also the assumption that once we entered the euro, everything would be more financially stable for us all. I found out for my first wordpress blog that in Ireland, per capita,… Read more »
Yesterday, April 30, 2014, the U.S. Federal Reserve announced the following: “Beginning in May, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $20 billion per month rather than $25 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $25 billion per month rather than $30 billion per month,” In other words the Fed is still feeding the mortgage-backed securitization monster, at a pace of $20 billion per month. Grey Fox is right. For David to write about the Irish banking crisis without even mentioning mortgage… Read more »
In relation to the state‘s perceived incompetence and the unbelievable sequence of events clearly highlighting the broken nature and bankruptcy of the state and its agents… If we look around at the other nation-states we may well be prompted to ask; well, by which state or set of values ought we measure ourselves against or refer to as we aspire towards…greatness? Or perhaps at least, towards functionality? Who’ll be our role-models now that our role-models are gone? It then becomes slowly and not a little ominously clear that these self-same “problems” are widespread on a global scale-why, it must be… Read more »
@DMW “Some argue now that the bank guarantee is the root of the Irish banking crisis.” And ‘some’,it can be argued,are perfectly correct in this assertion. “The bank guarantee was [indeed] the root of the Irish banking crisis.” Gan dabht David ! Not that anyone here needs reminding,but the then already corrupt and frenzied banking system/environment in Ireland pre ’08,was further contaminated by: (i) an unfeared,unthreatening,blinkered or blind – Pat,”it’s a complete blank” Neary – who didn’t even know where the regulatory brake pedal was,and/or at a loss as to it’s functionality,or just plain didn’t give a sh*t either way… Read more »
@Tyler. Your posts indicate that you have intelligence a high level of education, insight and depth of personality etc. Much of what you say is a rehash though, of other people’s opinions or the dogma you are listening to from your buddies. Let me offer some well intention advice and don’t respond that I am engaging in an ad homenim attack because that’s not my intention. When you say dump serfdom find yourself the courage to demonstrate leadership and free the first and most important serf of all (which of course is yourself) from the cult that captured you. You… Read more »
Ladies and Gentlemen who subscribe to this blog. As you must well know by now we have the local and European elections coming up later on this month, so, these elections are going to give you all a chance to ‘do the right thing’. If you want to change this country for the better there is only one thing to do and that is to boycott all of the mainstream parties who have candidates standing in both elections and vote for Independent candidates or ‘People’s Candidates. A vote for anyone else is a vote for more of the same! Do… Read more »
Quote from Lucinda Creighton ( today Sunday Independent ) Re: Malaise in Irish Politics
“There is a complete absence of intellectual rigour in party politics as it now operates. It is a palace of zombies where people who are elected give up their faculties and capacities for independent thought.”
I was shocked to hear this reported by Vincent Browne on Thursday last – relating to one of Fine Gael’s water charge proposals? …that the vulnerable would receive a Free water allowance, but of course, terms and conditions apply ! Free,in this case,is a daily allowance of “a three minute tap run to allow brush one’s teeth, 2 flushes of the toilet,and a 7 minute power shower !!” Can you see intention here ?! Can you see the directionality here ? i.e. where this is all heading ??!! Can you see the [reductionism] mindset here? Can you see the control,the… Read more »
i just watched this
http://www.youtube.com/watch?v=VBPZ58dzjfE&feature=youtu.be
a short talk and then a Q&A session with Kyle Bass…..worth the watch
and our host ‘gettin’ tight’ with Tyler D !
http://www.zerohedge.com/news/2014-05-03/what-have-we-learned-banking-crisis-spoiler-alert-nothing-good
The comments by irish sovereignty and grey fox at the beginning of this article sent shivers up my spine. I can remember being told many years ago of the conspiracy surrounding Central Banks going back to henry the 8th and the bank of england: “In order to induce subscription to the loan, the subscribers were to be incorporated by the name of the Governor and Company of the Bank of England. The Bank was given exclusive possession of the government’s balances, and was the only limited-liability corporation allowed to issue bank notes.[14] The lenders would give the government cash (bullion)… Read more »